The general principle is that a trustee has a basic right to be indemnified out of the trust fund for expense or liabilities properly incurred on behalf of the trust.
However, this will only apply where the trustee has acted properly and reasonably. In such circumstances, the indemnity would cover the trustees’ own costs together with costs the trustee is ordered to pay to other parties.
The risk of exposure to costs is one of the reasons why it is crucial that trustees ensure that they are acting in accordance with their obligations.
As with all civil litigation, the starting point is the Civil Procedure Rules. The general principle is that costs will “follow the event”. This means that the unsuccessful party would be ordered to satisfy the costs of the other parties in addition to their own.
Ultimately, the Court has full discretion in respect of costs and can make such alternative order as it deems fit.
Application of costs in respect of different types of claims
In considering the potential cost implications, it is important to have regard to the nature of the specific proceedings. Broadly categorised, the main classes of dispute are as follows:-
- Trust disputes;
- Beneficiary disputes;
- Third-party disputes.
Generally trust disputes relate to issues concerning the construction or scope of the trust and can be sub-divided as:-
“friendly” litigation – for example a question regarding the true construction of the trust document or an issue arising in the course of administering the trust.
“hostile” litigation – this could include a challenge to the validity of the trust itself for example on the grounds of undue influence or could be a claim by a trustee in bankruptcy. In such circumstances, the trustees hold the trust funds as trustees for the original settlor or trustee in bankruptcy in addition to the beneficiaries specified in the trust instrument.
In reality, drawing the line between “friendly” and “hostile” litigation is not always straightforward.
Historically, there was a school of thought that the trustee has a duty to defend the trust. Trustees now adopt that approach at their peril. In the case of Alsop Wilkinson v Neary, Lightman J commented that:
“…where the dispute is between rival Claimants to a beneficial interest in the subject matter of the trust, rather the duty of the trustee is to remain neutral “.
He further commented that if a neutral approach is adopted then:
“…in respect of the costs necessarily and properly incurred, for example, in serving a Defence agreeing to submit to the Court’s Direction and on making discovery, the trustee will be entitled to an indemnity and lien”
If a trustee actively defends the trust and fails, then ordinarily he will not be entitled to any indemnity. This is particularly the case with regard to hostile litigation. The reasoning being that the expenditure incurred was in an unsuccessful attempt to prefer one class of beneficiaries over another. In those circumstances, a trustee is likely to be found to have acted unreasonably and not in the best interests of the estate.
The importance of trustees acting neutrally and being seen to do so cannot be underestimated. If they wish to preserve the protection against costs, then they must resist any temptation to act in a partisan manner.
This is usually where one or more beneficiaries dispute the actions or omissions of the trustees. For example, a beneficiary alleging breach of trust, seeking removal of the trustees and/or damages.
These types of claims are treated as ordinary “hostile” litigation and the usual costs consequences of the Civil Procedure Rules apply.
These types of dispute will also be treated as normal “hostile” litigation. However, it may be possible for the costs incurred by the trustees (and any costs which they are ordered to pay) to be recovered from the trust fund even where they are the unsuccessful party.
In respect of such disputes, Lightman J commented that:
“Trustees…are entitled to an indemnity against all costs, expenses and liabilities properly incurred in administering the trust and have a lien on the trust assets to secure such indemnity. Trustees have a duty to protect and preserve the trust estate for the benefit of the beneficiaries and accordingly to represent the trust in a third-party dispute.”
In order to secure the above protection and to avoid any challenge to their entitlement to an indemnity it is prudent for trustees in such circumstances to seek Court authorisation before deciding whether to pursue or defend such a claim. The right to an indemnity and lien will usually extend to the costs of making such an application. This type of application is known as a Beddoe application.
A Beddoe application is a separate action to which all the beneficiaries are joined. Wherever there is doubt as to whether trustees should pursue or defend a claim and there is no proper authority given to them by the beneficiaries, then it would be reasonable for them to seek the guidance of the Court.
A Beddoe application should be made prior to such a claim being brought or as soon as the trustees become aware that a claim is imminent/has been issued. In such circumstances, a request could be made of the Court to stay the main proceedings to allow the trustees to seek Beddoe relief.
The application for Beddoe relief must include full disclosure of the strength and weaknesses of the trustee’s case. If any opposing parties are additionally beneficiaries, then the Court will ensure that confidentiality is maintained for the purpose of the litigation in order that no privileged information is disclosed.
Without the protection of a Beddoe order (or provision within the final order in the litigation that the trustee’s costs may be met by the trust fund) if the trustees are not successful in the proceedings, they are likely to be personally liable to pay their costs and potentially those of the other parties. It should be noted that this is the case even where the trustees sought and reasonably acted upon professional advice.
Pre-emptive Costs Orders
It is possible to seek a trustee’s indemnity as to costs by way of an interim application within the hostile litigation. The major disadvantage is the difficulty that the trustees would face in providing a frank assessment of the merits of their case in the presence of their opponent.
Account and Assessment
Under Section 71(3) of the Solicitor’s Act 1974, a beneficiary is entitled to apply for assessment of costs incurred by a trustee. The Court has power to order a trustee to personally pay any amount found to be due if deemed appropriate.
Where a beneficiary is concerned that a trustee has improperly incurred costs of litigation, the beneficiary may claim an account by the trustee. In such circumstances, any amount payable to the trust fund by the trustee is likely to be determined by the process of a detailed assessment.
Trustees must act cautiously and in accordance with their obligations and duties. Failure to do so can result in serious consequences. If you have concerns in respect of a potential trust dispute, then please contact us on 01926 880798 for an initial no obligation conversation.